DEBT VALUATION AND INTEREST

DEBT VALUATION AND INTEREST

Chapter 9

Principles Applied in This Chapter

Principle 1: Money Has a Time Value. Principle 2: There is a Risk-Return Tradeoff. Principle 3: Cash Flows Are the Source of Value

Corporate Borrowings

There are two main sources of borrowing for a corporation:

1. Loan from a financial institution (known as private debt since it involves only two parties)

2. Bonds (known as public debt since they can be traded in the public financial markets)

Borrowing Money in the Private Financial Market

Financial Institutions provide loans

Working capital loans to finance firm's day-to-day operations

Transaction loans for the purchase of equipment or property

Loans may or may not be secured by a collateral.

Table 9-1 Types of Bank Debt

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